Labour offers a more credible policy mix -but BREXIT means neither party’s vision is achievable

 

The vision of the future offered by the Tories implies, according to the Institute for Fiscal Studies :

 

I. Living standards in 2022 will be no higher than in the pre-financial crisis year of 2007, which means the Conservatives will have presided over the longest period of stagnating incomes since the Napoleonic wars.

 

ii. The poorest third of the population will actually be worse off than in 2007, due to the benefit cuts that have yet to take effect.

 

iii. Further misery will be caused by collapsing public services, as the Tories extend to 12 years the most severe squeeze on the NHS since it was founded in 1947

 

The Labour manifesto offers a less bleak outlook, with significantly higher borrowing to fund investment (something the IFS supports), and higher expenditure on public services funded by taxes on the better off. The Labour vision would imply a role for the state somewhat larger than at present, but in line with other high income countries in Europe.

 

The main IFS criticism is that Labour may need to extend some tax increases beyond the higher income groups that it says it will target, because IFS analysis suggests  that just hitting the very well off will not raise as much as claimed. That need not be a fundamental criticism:- it requires an adult debate when and if Labour are in Government concerning what can be afforded and what levels of taxation the electorate are willing to support in order to secure better services. It might also require some better targeting of expenditure promises – but at least an attempt has been made to cost the Labour manifesto, something that the Conservative manifesto does not do.

 

The bigger problem for both manifestos is that they may not be deliverable if the UK is simultaneously self-harming by proceeding with BREXIT. BREXIT will mean:

 

I. Economic growth is likely to be slower:

 

a. We are in for a prolonged period of uncertainty as to our future trading relationships not just within Europe but in the wider world. Decisions to invest will be delayed, some investments that might have come to the UK will go elsewhere to avoid the uncertainty, some activity will re-locate to the EU.

 

b. There is no evidence to suggest that there are offsetting benefits to growth as a result of looser regulation or lower taxation. Our growth rate within the EU has been comparable to that of Germany and the US and slightly higher than the average of high income countries – so there is no reason to believe that the EU has been holding us back. The fast growing countries are those like China who are still catching up with income levels in the rich countries, and no mature economy can expect to do as well.

 

ii. The budget situation will be even worse:

 

a. Any savings on our contributions to the EU will need to be offset by the cost of existing commitments, and the cost of expensively creating at national level equivalent institutions to those that currently provide needed services at European level (or paying for continued use of EU institutional arrangements). The amount of unnecessary or wasteful expenditure that we pay for is likely to turn out to be a relatively small share of our contribution, outweighed by the higher overheads and duplication of creating UK equivalents from scratch after 50 years without them.

 

b. If we succeed in reducing migration, which seems to be a major demand by those who supported BREXIT, there will be an immediate impact on the budget through the loss of tax revenues the migrants would have paid,  the increased cost of training and recruiting national staff to do jobs nationals were previously unavailable or unwilling to do, and the cost of expensive and inefficient non-solutions like trying to recruit agency staff to cover the gaps.

 

c. The biggest impact of leaving the EU is likely to be felt initially in London and the South East. Those elsewhere in the country can be forgiven for shedding no tears for the wealthy city folk, but the impact on the budget is less easily dismissed, with London and the South East the only part of the country that raises more in taxes than it spends on services. If the impact on London turns out to be significant, as seems worryingly likely, then the effects of a reduced tax surplus will be felt in even less money for supporting public services and paying benefits in the regions.

Whichever party forms the next Government will face severe economic and social problems caused by the unprecedentedly long period of flat incomes and underfunded public services. It seems utterly bizarre that both parties are committed to making these serious problems disastrous by proceeding with a BREXIT that offers no benefits. We are ‘taking back control’ of the ship in order to steer it into the iceberg. Both parties are grossly irresponsible to continue to steer full speed ahead on the current course on the basis that a fairly small majority of the crew thought that it was a good idea almost a year ago.

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Why so little BBC coverage of Yemen?

Listening to the Today programme on Radio 4, they found time for a long piece on Emojis, and continuing fact-free speculation about what might be happening to the child abuse enquiry, but nothing at all on Yemen the day after the debate in the Commons. The only explanation I can think of for the continuing neglect is that BBC news values have been corrupted by a desire not to upset the Saudis, the Americans, and our arms industry.

How Labour Can Win

How Labour Can Return to Power

There is a possible route back to power for Labour, based on three strong policy platforms:-

 

i. Remain in the EU

Be the party for the 48% who wish to remain in the EU, and for the many more who are coming to that view as the lies of the leave campaign and the shambles of the negotiation become increasingly obvious.

ii. Reduce Inequality

But also be the party for those who have been left behind by globalisation, many of whom voted Brexit because they had so little to lose. Labour was always the party of redistribution, taxing those who can afford it in order to help those who need support. We need to focus on the hardships faced by so many and tackle head on the inevitable Daily Mail critique that Labour wants to tax ‘hard working families’ to provide handouts to the workshy. The approach cant be just about taxation and benefits, it also concerns investment in infrastructure to support a more balanced distribution of economic growth, less biased towards the South East. But we also need to say explicitly that economic growth is not the only goal, we have to concern ourselves with how the benefits are shared.

 

iii. Invest in public services – including a commitment to adequately fund health and social care.

We spend far less on health than other richer countries including our European neighbours. Comparison with others suggests we already have the most cost effective health system in the world. Meeting rising demand effectively is only possible with more money, something we should be willing to pay for.

 

There are several good answers to the question ‘how do we pay for all this?’:-

Relax Austerity: As argued in a previous blog (’public expenditure cuts:not needed, but very damaging’, https://mickfoster.wordpress.com/) , there is no pressing case for further austerity, and a higher share of public expenditure in GDP is prudent in current circumstances where debt service remains low by historic standards, and is likely to remain so. Without making the further cuts proposed by the Tories, the debt will fall as a share of GDP simply through economic growth at historic rates, and there is also scope for higher taxes, ending our participation in a race to the bottom.

 Better In than Out: If we do not leave the EU, we will save ourselves considerable costs of adjustment and will benefit from rather higher economic growth. This theoretical result from modelling is already being confirmed by the plunge in the value of the pound at the prospect of a hard Brexit.

Stop Tory Vanity Projects: We could liberate some funds for worthwhile public expenditure by changing our priorities – scrap the dubious Hinkley and HS2 projects, and (ideally) the entirely pointless expenditure on Trident.

 

Can this bring Labour back together?

With the exception of the possibly contentious issue of Trident (though I have never understood why such lunacy has support in the party), I would imagine that a platform based on these three pillars could be attractive to most Labour MPs. There will need to be debate based on research to help forge evidence-based compromises on how far to push issues such as redistribution and a more expansionary fiscal policy. The prospect of a reasonable shot at forming a Government should focus minds.

 

What is the alternative?

I doubt if there is one in the short term. I suspect that there will be an opportunity for a no-confidence vote that might prompt a new general election at some stage in the run up to triggering Article 50. The only hope for Labour to be a relevant political actor in that process –or indeed in 2020 – is if it has something distinct and clear to say on the case for remaining in Europe. That is the only issue where there is a real possibility of attracting enough new voters to evict the Conservatives. When the Tory Government seem set on inflicting enormous and irreversible damage to our economy, our society, and our Union, there is a once in a lifetime opportunity to be the party of the sane alternative, attracting voters who would not perhaps normally vote Labour. We must seize that opportunity.

Who is better at managing the UK economy, Labour or the Tories?

Economic Growth under Labour and under the Tories

Looking at the long term economic growth rate under both Tory and Labour Governments since 1950, there is no significant difference between them – it averages 2.6% p.a. during periods of Tory rule, 2.5% per annum under Labour[1].

 

Both parties performed poorly until the 1980s

Comparing the performance of the UK to France, the USA, and the average of high-income OECD countries, the UK economy performed poorly compared to our competitors under both Tory and Labour Governments until the end of the 1970s[2].

 

The conservatives under Thatcher initially presided over a deep recession that caused mass unemployment and extreme misery, but later years did see the UK outperform our competitors on economic growth. Over the 1979-97 period of Tory Government as a whole, however, the GDP increase of 52% under the conservatives was higher than France’s 44% but lagged a long way behind the 63% average of the OECD countries let alone the 70% increase in the USA.

 

The only post-war Government to achieve faster economic growth than the average of all rich countries is the labour Government of 1997-2010[3]. Under labour the economy grew by nearly 30%, whereas the high income countries as a group achieved growth of about 28%. From 1997-2008, Labour consistently achieved high GDP growth with low inflation. During the period, the cumulative increase in national output per head in the UK was greater in percentage terms than in either the US or France. The major and important difference from the Conservatives is that labour achieved this good performance while also distributing the benefits more equitably, achieving major reductions in poverty, especially child poverty.

 

The period of growth came to an end with the global financial crisis. During the global recession from 2008, the cumulative decline in national GDP in the UK was about 4.7% compared to an OECD average of about 3.5%, and about 3% in the US and France. The UK was hit harder because of the far greater relative importance of banking and finance in the UK economy. The recession was not caused by labour economic mismanagement.

 

What is less well recognised in the UK (though acknowledged in other countries) is that the UK performed a really significant role in brokering the necessary international action to save the world financial system from collapse[4]. It is ironic that labour ended up with a reputation for economic incompetence when most international observers would give the UK much of the credit for preventing the global recession being a whole lot worse.

 

Under the Tory led coalition since 2010, recovery in the UK was slow, and (unlike the US) the UK had still not recovered the pre-slump peak level of output per head by 2014. The IMF and other commentators have argued that unnecessarily severe austerity policies have damaged economic growth since 2010[5].France performed even more poorly during the recovery because of the problems of the Euro zone – the decision to keep us out of the Eurozone was another example of sound Labour economic judgement.

Economic Management

Growth is only one aspect of economic management. Another indicator of the skill in economic management is the control of inflation, with both parties accepting that a target of about 2% per annum is appropriate. Although direct responsibility is given to the Bank of England (a significant reform introduced by Labour), Government can make their task much more difficult if it fails to retain good control of its own spending.

 

Recent economic history suggests that Labour has performed better than the Conservatives.

 

Both Labour and Tory Governments struggled to control inflation in the 1970s in the face of multiple oil shocks abroad and industrial relations problems at home. Despite the severity of the recession that it induced through over-tight monetary policy in the early 1980s, the Thatcher Government still struggled with inflation rates above 5% as late as 1991.

 

Under Labour from 1997, the UK consistently enjoyed a benign combination of moderate inflation and economic growth. Only the global financial crisis brought this to an end. As argued elsewhere, this was not caused by labour, nor was the labour Government especially profligate in its spending decisions. It was appropriate to allow some expansion in the budget deficit to avoid a still deeper recession. The debt never approached unmanageable levels. The debt has been far higher than the current level of about 80% of GDP for much of our history, it is easily financed with current low global interest rates, and will come down in relative terms as economic growth is restored-  even without the planned deep cuts in public spending.

Did Labour ‘Tax and Spend’ Excessively?

Another frequent allegation is that Labour Governments tax and spend excessively. Judge for yourself:-

I. The labour Government of 1997-2010 generally spent less than the 38% of GDP level reached in the final years of the previous Conservative administration. There was a brief (and rapidly reversed) expenditure blip to 38.8% in 2005, but the eve of the global economic crisis saw the Government spending the same share of GDP as their predecessors. Tax revenue was a little higher, which could be argued to reflect a prudent policy of avoiding excessive deficit spending in good times.

2. During the global crisis, which required extra expenditure to avoid a deep recession, expenditure peaked in 2009 at 43.6% of GDP. This is higher than the average of the rich OECD countries, but is lower than France (47%) and comparable to Denmark (43%) Italy (42%) and the Netherlands (42%). Those who have suggested that Labour economic policies would lead to disaster might want to contemplate these figures – and the fact that high spending Denmark and the Netherlands score 3rd and 6th in the global rankings of the World Happiness Report.

Conclusion

The conclusion to draw from this analysis is that there is little difference between the two parties in terms of the quality of economic management. If anything, Labour has performed better since 1997, enjoying greater consistency with less ‘boom and bust.’

 

The big difference between the two parties is in how the fruits of economic growth have been distributed. That will be the subject of a future briefing note.

[1] Calculated by the author from Office of National Statistics GDP data.

[2] Based on World Bank World Development Indicators. Re-unification makes a comparison with Germany difficult.

[3] World Bank, world development indicators, analysis by the author

[4] For quotes and analysis see William Keegan, Saving the World”? Gordon Brown Reconsidered , October 2012, ISBN 978-1-907720-56-7

[5] For IMF quotes see, http://www.theguardian.com/business/2013/may/22/imf-uk-economy-verdict-eurozone-osborne

The cuts

I am attaching a short piece on the cuts which I did partly to support the Labour Party campaign in Chelmsford – though the views and accuracy are my responsibility alone.

Public Spending Cuts: Not Needed, but Very Damaging

 

Osborne claims that the cuts are necessary for the future health of the economy.

 

This is not true. They are a choice made by an extreme Government intent on reducing the role of the State in providing essential services and a safety net for those who fall on hard times.

 

Some facts:-

No Need for Austerity

 

  1. Public debt at  about 80% of GDP is not high by historical standards (it was over 200% when the NHS was established, and over 100% for much of our history). If nothing more is done to reduce the deficit, the effects of economic growth and inflation mean that it will fall anyway as a share of a growing economy.

 

  1. Because interest rates are so low (and likely to remain so), the 2.5% of GDP annual cost of servicing the debt is trivial. The Thatcher and Major Governments spent more on debt interest in every year they were in power – but nobody then argued that public spending cuts were needed on the scale currently planned.

 

This is why most economists argue that there is no need for further cuts – and they support the case for maintaining spending. At 43% of GDP, public spending is comparable to the average level in the 1970s. It is slightly above the long term average of 40%, but that is to be expected in a period of sluggish growth when Government needs to maintain spending to boost the economy.

Low Tax and Low Spend means Private Affluence for some –Public Squalor for All

 

Osborne claims he is ‘repairing the roof while the sun shines.’ In fact, the sun is not shining on most of us, and this Government is not repairing anything much at all – as the state of our pot-holed roads and the strains on our health and education services will attest. Private affluence for the few is resting on public squalor for us all.

 

Our World Class NHS is Under Threat

We have public services to be proud of – but they are under threat. As recently as 2014, the Commonwealth Fund rated the UK health care system as the best in the world – based on the quality of care, efficiency, and low cost to patients. We achieve this by spending less than other countries -just 8.5% of our national income on health –compared to 11% in major European countries like France and Germany, and a staggering 16% in the US, which is consistently rated as having the worst health care system in the world.

 

These good results though are threatened by rising costs and an ageing population. If we want to keep our good services, we will need to spend a little more – but the extent of the increased spending required will be less if we maintain our efficient Government funded service free at the point of delivery. Outsourcing of services threatens this – bringing in private providers from the inefficient and expensive US system, and undermining the fundamental features of an NHS which is rightly valued in this country.

 

The Cuts in Mid Essex

 

We can see the results of inadequate public funding in our own home town. One important example is the Mid Essex NHS Trust – which runs Broomfield Hospital. The trust has one of the lowest levels of spending per head of population in the country. In 2012-13, it was £24 mn short of the level that Department of Health guidance says is the minimum necessary to provide a uniform level of service. This is over 4% of total expenditure – and the strains have probably increased since.

 

Given the grossly inadequate funding available, it is not surprising that Broomfield has been rated as requiring improvement in the latest Care Quality Commission report, with urgent and emergency services described as ‘inadequate’. Management and staff will get the blame – but the real culprit is a Government trying to maintain a world class health system on the cheap.

 

Conclusion

The very deep cuts now being enacted by this Government threaten fundamental aspects of our way of life as a caring society that wants and can afford a good standard of public services and amenities. Meanwhile this Government continues to fund Cameron’s vanity projects – preposterously expensive nuclear power from Hinckley Point, new high speed rail links based on questionable economic analysis while the roads are full of potholes, and a nuclear weapons system the purpose of which has yet to be explained other than a desire for Cameron to look more important at conferences.

 

We need to fight the cuts – before the deterioration to our fundamental public sector institutions becomes too extensive to be easily repaired by the next Labour Government.

Mick Foster: economist, drummer, and would-be author

Thanks for visiting my site. I am an economist with more years of experience than I care to admit to, most of it in overseas development, though I have also worked as Chief Economist in the UK Home Office, and had a brief stint in the Cabinet Office. The site contains:-

i. My research and consultancy work on economic development – most of this is available on researchgate.net, but not everyone has access to that.

ii. Discussion of policy issues that interest me, trying to push back against the avalanche of lies and distortions that seem increasingly to taint our politics and our media coverage.

iii. Some of my fiction writing while I figure out how best to get it either published or self-published. Short stories under the heading ‘Lives in Development’ can be seen here https://mickfoster.files.wordpress.com/2015/10/lives-in-development.pdf

iv.  I will also have a theme for the various bands and music events I am involved in, with a few links to where our music can be heard.